Washington and Lee Law Review
Volume 19 | Issue 1
Article 2
3-1-1962
Railroad Mergers: Competition, Monopoly and
Antitrust
Charles F. Phillips, Jr.
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Charles F. Phillips, Jr., Railroad Mergers: Competition, Monopoly and Antitrust, 19 Wash. & Lee L. Rev.
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Washington and Lee Law Review
Member of the Southern Law Review Conference
Spring 1962
Volume XIX
Number I
RAILROAD MERGERS:
COMPETITION, MONOPOLY, AND ANTITRUST
By
CHARLES
F.
PHILLIPS, JR.*
The American railroad industry is undergoing a significant change
in structure due ,to mergers. While mergers are not new -to the industry, three characteristics distinguish the present merger movement
from former ones. Firstly, the railroad industry is no longer a natural
monopoly. Indeed, railroads are engaged in strong competition with
other modes of transportation: with trucks and barges for freight
and with airlines, busses, and private cars for passengers. Secondly, the
present merger movement is voluntary, i.e., the initiative for mergers
is coming from within the industry. Faced with declining earnings
and traffic,' confronted with growing competition, and operating
within a different legal environment, the current motivation is largely financial, based upon a desire to increase efficiency. In turn, mergers
tend to reduce the roads' heavy fixed costs, and hence total costs,
thereby increasing their potential competitive position in the trans*Assistant Professor of Economics, Washington and Lee University. B.A. 1956,
University of New Hampshire; Ph.D. 196o, Harvard University.
'The industry's rate of return on net investment averaged 3.6% for the decade
of the 195o's, but fell to 2.13% in 196o-the lowest since 1938. The industry ranked
at the bottom of the list of some 70 major industrial groups with respect to profit
ratios, and was well under the traditional 6% rate of return allowed or earned by
other regulated industries. A total of 27 Claos I railroads, ig of them in the East,
tuzrncd in deficits for 196o.
The trends of freight and passenger traffic indicate a similar situation. Freight
hbuincss amounted to 3o.4 million carloadings in 196o, down from 41.3 million in
ig16 and 5'2.8 million in 19-9. In contrast, truck loadings in 196o were 3 1/2 times
the 19-6 level and barge traffic almost doubled between those years. The railroad
share of total intercit) freight traffic declined from 67% in 1946 to under 50%
in 1959; the share of commercial intercity passenger traffic from 66% to about 25%
in the same period.
As a result of this traffic loss, net income in 196o of S.t45 million was the lowest
since 1949 and less than half what it was in 1929. Railroad employees have also
been affected by the traffic decline: the railroads had 780,000 employees in 196o,
down 13% from 1946.
2
WASHINGTON AND LEE LAW
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[Vol. XIX
portation industry. Thirdly, in the past few years, the attitude of the
Interstate Commerce Commission toward mergers has become favorable-in fact, permissive.
The railroads were actively encouraged by the Federal Government, between World War I and World War II, to work out merger
plans. Several plans for combining the roads into a limited number
of systems were presented. Numerous obstacles, however, prevented
the adoption of any one plan. With so many plans proposed, no
agreement as to the best one could be reached. The weak and strong
problem was, and still is, a major hindrance: the stronger lines were
reluctant to merge with the unprofitable weaker lines. The Interstate
Commerce Commission was not even sure that mergers should be encouraged. And, perhaps of more importance, railroad management
showed little enthusiasm for, or cooperation about, mergers. As a result, only a few mergers were forthcoming.
Opposition to railroad mergers, of course, is still strong, as it was
in earlier years. The most vocal foe is the Railway Labor Executives
Association, composed of the leaders of the nation's twenty-three railroad unions. The Association, worried about the jobs that would be
eliminated by mergers, has adopted a policy of opposing all pending
mergers. Without naming the Interstate Commerce Commission, the
Association recently stated that merger approvals should be the responsibility of "an agency that is not ridden with bureaucratic incompetence and dominated by the interests they are supposed to regulate."2 Nor are the unions the only obstacle faced by merger-minded
railroads. Numerous Congressmen and state officials have announced
they will intervene before the Interstate Commerce Commission to try
to block such moves. 3 The Department of Justice has disclosed it is
4
looking closely at rail mergers with antitrust action in mind. Even
2
Wall Street Journal, December 27, ig6o, p. 2, cols. 2 and 3. March 27, 1961, p. 17,
col. s; and April 6, 1961, p. s, col. 6.
"Two resolutions, for example, were introduced in the last session of Congress
dealing with railroad mergers. Both H.J. Res. 371 (introduced by Congressman
Rhodes) and S. Res. 150 (introduced by Senator Humphrey, on behalf of himself
and eighteen other Senators) were aimed at slowing down ICG approval of pending
mergers until Congress could review the problems arising from the merger movement.'Neither resolution was acted upon during the session.
4
The Justice Department's first statement of position on the merits of a proposed railroad merger was filed with the ICG on October 31, 1961, in the Seaboard
Air Line and Atlantic Coast Line case. The Department stated that the proposed
merger would "flagrantly contravene" the antitrust laws because it would "destroy
the vigorous competition" that exists between the two lines. In addition, the brief
argued that the merger would "jeopardize the existence of several small railroads"
in the Southeast, would injure some communities and shippers who would be left
1962]
RAILROAD MERGERS
3
railroads are intervening to oppose the mergers of other railroads,
fearing the increased competition which is sure to come from combined operations and not wishing to be left "outside.":, And a Northern Pacific Railroad conductor, who owns sixteen shares of the line's
stock, recently engaged in a proxy fight to get elected as a director
so as to oppose a proposed merger with two other lines. 6
The present article is a summary and evaluation of pubic policy
toward railroad mergers. The first two sections are historical: the first
deals with the role played by antitrust policy in earlier railroad mergers and the second with various consolidation plans presented between
the two world wars. The third section discusses the present statutory
provisions concerning railroad mergers and their interpretation. The
economics of mergers are outlined in the fourth section, followed by
a discussion of public interest. Finally, the question must be asked:
can mergers "save" the railroad industry?
I. Railroad Mergers and Antitrust
Late in the i89o's a nationwide railroad merger movement began.
Even at this early date, railroad combinations were not new, as our
largest railroad systems had been built by the combination of numerous independent companies. The New York, New Haven & Hartford
Railroad, for example, was a combination of 203 separate companies,
the Chicago, Burlington & Quincy Railroad of approximately 200
different companies, and the Pennsylvania Railroad system of over
6o0. 7 Between 1884 and 1888 alone, there were 425 consolidations. 8
The mergers of the nineties, however, were not so much for the purpose of building up railroad systems as for the purpose of eliminating competition. Two examples of the more important combinations
of the period will indicate the extent to which competition was being
eliminated.
In the Eastern Territory, two large systems had developed prior to
igoo: The New York Central and the Pennsylvania. Between igoo
with reduced rail service, and would "impair adequate transportation." Quoted in
Wall Street Journel, November i, ig6i, p. 4, col. 3.
5For example, two roads, the Southern Pacific Co. and the Atchison Topeka,
and Santa Fe Railway Co., are fighting for control of the Western Pacific Railroad,
a small but financially healthy line that operates between San Francisco and Salt
Lake City. Because of the strategic location of Western Pacific's tracks, ten carriers
are involved in the battle. See Wall Street Journal, July 14, 1961, p. 22, cols. 1-3;
"Mating Time for the Railroads," Fortune, January, 1961, pp. 15-21, 142-49a.
Vall Street Journal, April 17, 1961, p. 1o, col. 2.
7Locklin, Economics of Transportation 298 ( 5 th ed. 196o).
"1889 ICC Ann. Rep. 77-79.
4
WASHINGTON AND LEE LAW REVIEW
[Vol. XIX
and 1902 the Pennsylvania bought a significant amount of stock in
the Baltimore &cOhio Railroad, the Chesapeake & Ohio Railway, and
the Norfolk Sc Western Railway. The New York Central already had
a large interest in the Chesapeake Sc Ohio. The Reading Railroad
and the Central Railroad of New Jersey came into the system when
the Reading Company, which controlled both of these railroads, was
acquired partly by the Baltimore & Ohio -and partly by a subsidiary
of the New York Central. Many smaller lines were also held individually or jointly by the New York Central and the Pennsylvania or their
subsidiaries. These combinations left the New York Central and the
Pennsylvania in control of the major lines in the Eastern Territory and
Pocahontas Region.
In the West, two important combinations were formed. The Union
Pacific Railroad, under the control of Harriman, controlled the Oregon
Short Line and the Oregon Railroad & Navigation Company. In 1901,
the Union Pacific acquired a large stock interest in the Southern Pacific
Company, which in turn controlled both the Central Pacific Railroad
and the Pacific Mail Steamship Company. Subsequently the Union
Pacific acquired a 50 per cent interest in the San Pedro, Los Angeles
&-Salt Lake Railroad, and about 1g per cent of the stock of the Atchison, Topeka &cSanta Fe Railway. To the north of this system were
the Hill and Morgan lines-the Great Northern Railway and the
Northern Pacific Railway. These two lines, totaling about 9,000 miles,
were parallel and competing across the continent between the Great
Lakes and the Pacific. Early in igoi, the Great Northern and the
Northern Pacific purchased nearly 97 per cent of the stock of the
Chicago, Burlington & Quincy Railroad. Thereafter, in November of
the same year, the two lines were brought together by the creation of
the Northern Securities Company-a holding company which obtained
control of both roads by exchanging its stock for the shares of the
Great Northern and the Northern Pacific. The Harriman, and the
Hill-Morgan interests thus dominated the major western lines.
Under such circumstances, antitrust policy was used in an attempt
to maintain competition among the nation's railroads. In 1904, the
Supreme Court ordered the dissolution of the Northern Securities
Company. 9 In 1912, the Court held that the ownership by the Union
Pacific of 46 per cent of the stock of the Southern Pacific violated the
Sherman Antitrust Act. 10 A further dissolution of the Harriman comOUnited States v. Nothern Securities Co., 193 U.S. 197 (1904).
1
'United States v. Union Pac. R.R., 226 U.S. 61 (1912). It should be noted that
in the Northern Securities case, the assets, consisting of Northern Pacific and Great
Northern shares, were distributed to the stockholders of the holding company. The
RAILROAD MERGERS
bination was required in 1922, when the Court ordered the breaking
up of the control of the Central Pacific by the Southern Pacific."
Threatened antitrust prosecution resulted in the dissolution of the
New Haven monopoly in New England, as the railroad agreed to
surrender control of the Boston & Maine Railroad, in addition to disposing of its holdings of stock in various trolly lines and steamship
companies. In 1929, the Baltimore & Ohio, the New York Central, and
the New York, Chicago Sc St. Louis Railroad (Nickel Plate) were
ordered under the Clayton Act to dispose of stock of the Wheeling Q
Lake Erie Railway. 12 In 1930, the Pennsylvania Company and the
Pennsylvania Railroad Company were ordered to divest themselves
of their holdings of the stock of the Lehigh Valley, 13 and the Baltimore
4
& Ohio was ordered to dispose of stock of the Western Maryland.
During most of this period the railroad industry had a virtual
monopoly of transportation in the United States, with pipelines providing the only important competition. Intercity truck transportation
did not begin until 1918; modern barge transport on inland
waterways did not begin until the 192o's; and commercial air transport until 1926. Consequently, during this period public policy
sought to protect consumers against excessive railroad rates by promoting competition among carriers. Said the Interstate Commerce
Commission in 1907, "Competition between railways as well as between other industries is the established policy of the nation."'I5 In
many cases before the Court, the wisdom of trying to enforce competition between carriers was questioned, but the Court considered this
a question for Congress to decide. Said the Court in the Northern
Securities Case:
game stockholders, therefore, controlled both railroads and dissolution did not
immediately restore competition between the two systems. In the Union Pacific
case, however, the Supreme Court refused to permit the railroad to distribute its
Southern Pacific shares to its stockholders, because it would leave the Union Pacific
stockholders in control of both railroads. United States v. Union Pac. R.R., 226 U.S.
,170 (1913).
UnUnited States v. Southern Pac. Co., 259 US. 214 (1922). The decree was never
carried out, however, as the Southern Pacific obtained the permission of the Interstate Commerce Commission to retain control of the Central Pacific under the provisions of the Transportation Act of 1920. 76 I.C.C. 5o8 (1923).
"Interstate Commerce Comm'n v. Baltimore & Ohio R.R., 152 I.C.C. 721; 156
I.C.C. 607 (1929).
"'Interstate Commerce Comm'n v. Pennsylvania R.R., 169 I.C.C. 618 (193o).
The Commission's order was subsequently set aside by the courts, Pennsylvania
R.R. v. Interstate Commerce Comm'n, 66 F.2d 37 (3d Cir. 1933), aff'd by an equally
divided Court, 291 US. 651 (1934).
"Interstate Commerce Comm'n v. Baltimore & Ohio R.R., 16o I.C.C. 785 (1930),
183 I.C.C. 165 (1932).
15Consolidations and Combinations of Carriers, 12 I.C.C. 277, 305 (1907).
6
WASHINGTON AND LEE LAWV
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[Vol. XIX
"Whether the free operation of the normal laws of competition is a wise and wholesome rule for trade and commerce is
an economic question which this court need not consider or determine. Undoubtedly, there are those who think that the general business interests and prosperity of the country will be best
promoted if the rule of competition is not applied .... Be all
this as it may, Congress has, in effect, recognized the rule of
free competition by declaring illegal every combination or conspiracy in restraint of interstate and international commerce.
As in the judgment of Congress the public convenience and the
general welfare will be best subserved when the natural laws of
competition are left undisturbed by those engaged in interstate
commerce, and as Congress has embodied 'that rule in a statute,
that must be, for all, the end of the matter, if this is to remain
a government of laws, and not of men."'"
The policy of prohibiting railroad merger during this period was
subject to much criticism. As early as 189o the New Hampshire Supreme Court recognized that railroad competition might become
ruinous in character.
"While, without doubt, contracts which have a direct tendency to prevent a healthy competition are detrimental to the
public and consequently against public policy, it is equally free
from doubt -that when such contracts prevent an unhealthy
competition, and yet furnish the public with adequate facilities
at fixed and reasonable rates, -they are beneficial, and in accord
with sound principles of public policy. For the lessons of experience, as well as the deductions of reason, amply demonstrate that the public interest is not subserved by competition
which reduces the rate of transportation below the standard
of fair compensation; and the theory which formerly obtained
that the public is benefited by unrestricted competition between
railroads has been so emphatically disproved by the results
which have generally followed its adoption in practice that the
hope of any permanent relief from excessive rates through the
competition of a parallel or rival road may,
as a rule, be justly
17
characterized as illusory and fallacious."'
At the same time, the powers of the regulatory bodies over railroad rates and practices were insufficient to prevent the railroads from
exercising their monopoly power. The public, therefore, was unwilling to give up the protection afforded by competition among roads.
Gradually regulatory control over the railroads was strengthened. In
turn public policy toward railroad competition and mergers was
10193 U.S. 197, 337-38 (1904).
"Manchester & Lowell R.R. v. Concord R.R..
2o
AtI. 383, 384 (1890).
1962]
RAILROAD
MERGERS
modified. Beginning with the Transportation Act of
dation'3 was actively encouraged.
1920,
consoli-
II. Consolidation Plans
The railroads were operated by the Federal Government during
World War I. By the Transportation Act of 192o, the roads were returned to private ownership. In addition, the Act sought to bring
about the consolidation of railroads into a limited number of systems,
and provided for the exemption of the carriers from state and federal
antitrust laws when necessary to effect any combination authorized
by the Commission. The Commission was directed to formulate a
plan for consolidation, which was to be designed: (i) to preserve competition as fully as possible, (2) to maintain existing routes and channels of trade wherever practicable, and (3)to develop systems of approximately equal earning power under a uniform level of rates. 19 "As
a result of the enactment of the Transportation Act of 1920, consolidation of the railroads of the country, in the interest of economy
and efficiency, became an established national policy, and the effective
consolidation of the railroads in conformity to the provisions of the
Act and to the plan of consolidation which the Commission was directed to prepare became a matter of public interest."2 0 It should be
noted, however, that the Commission was "to preserve competition as
fully as possible" when drawing up a plan of consolidation. Congress
clearly intended that the limited number of systems to be created
were to be competitive. 2' Moreover, consolidation under the Act was
to be voluntary.
After much debate and dispute, the Commission published, in 1929,
a plan for consolidating the nation's railroads into twenty-one independent systems,22 and in 1932 an extensive revision of the plan for
"Consolidation means to form a new corporate entity out of two or more
corporations which are extinguished in the process. Merger is the process by which
one corporation absorbs another, the latter ceasing to exist. For purposes of this
paper, the two terms are used synonymously.
"41 Stat. 456, 481-82. Under the provisions of the Act, two or more railroads
might consolidate if: (i) the Commission found the consolidation to be in the
public interest, (2) the consolidation was in conformity with the Commission's plan,
and (3)the stocks and bonds of the new company did not exceed the value of
the consolidated properties as determined by the Commission under the Valuation
Act of 1913.
nUnited States v. Lowden, 3o8 U.S. 225, 232 (1939).
nSee Green, Preliminary Report of Study of Railroad Consolidation and Unification, 71st ong., 3d Sess., Part I at 15-24 (193).
22n the Matter of Consolidation of the Railway Properties, 159 I.C.C. 522 (1929).
A tentative plan, based upon the work of Professor William Z. Ripley, was issued
8
FASHINGTON AND LEE LAW REVIEW
[Vol. XIX
2
the Eastern Territory was announced. Not one of these systems has
ever materialized. During the next few years, other unification plans
24
In general, these
were formulated, but again none was accepted.
plans were either "regional" or "competitive" consolidated systems.
The former sought to have one railroad serve a particular geographic
area; the latter attempted to preserve competition by having at least
two roads serve a major region of the country. Each had its disadvantages. "WAhith regard to a regional plan, many thought that elimination of competition from an area would not better serve the public interest because the complete dependence of a territory upon the
monopoly of one carrier would not provide more efficient service nor
lower transportation charges. The competitive plan was regarded as
faulty in that it failed to recognize the fact that large segments of cer25
tain regions were at the time served by only one railroad." In addition, the severe financial plight of the whole economy, including the
railroads, during the thirties made any giant merger plan all but impossible.
The National Transportation Committee, in 1933, issued a report
20
recommending compulsory consolidation. However, Congress, in the
Emergency Railroad Transportation Act of 1933,27 rejected this recommendation, but did tighten the Commission's control over proposed mergers. The Act established the office of Federal Coordinator
of Transportation to investigate transportation problems and to make
recommendations. In his 1936 report it was said, "[W]hile a plan of enforced consolidation, or other species of unification, into a very few
systems is not deemed desirable, there are many situations where the
amalgamation of railroad companies will accomplish good results and
should be encouraged." 2
In 1938, President Roosevelt appointed three members of the Interstate Commerce Commission as a "Committee of Three" to study
by the Commission in 1921. The report, however, was less than two pages. See In
the Matter of Consolidation of the Railroad Properties, 63 I.C.C. 455 (1921).
=Consolidation of Railroads, 185 I.C.C. 403 (1932).
"These plans are outlined in "Consolidations and Mergers in the Transportation Industry," Association of American Railroads, 35-37 (February, ig6o) (mincographed).
'lId at 9. In 1938, Commissioner Miller of the Interstate Commerce Commission urged the unification of the nation's railroads into a single system tinder
private ownership. See Miller, A Suggested Plan for the Solution of the Railroad
Problems, 1938 (mimeographed).
O'Report of National Transportation Committee, February 13, 1933. For complete
text, see New York Times, February 15, 1933, PP. 38-39.
248 Stat. 211.
'Report of Federal Coordinator of Transportation 48 (January 21, 1936).
1962]
RAILROAD MERGERS
9
the railroad problem. This committee recommended new legislation
giving the Commission authority to require a unification where it is
sought by at least one carrier. 29 Because the proposal was opposed
by the railroad unions, the President appointed another committee
consisting of three railroad executives and three representatives of
railroad labor to make a further study of the problem. In its report
of 1938, that "Committee of Six" observed, "No objection could be
urged today against consolidation that could not have been urged
with much greater force against the actual consolidations of the past.
Yet without ,the consolidations of the past there would be no major rail
systems of today. The progress and accomplishments of the past are
indicative of the possibilities of accomplishments of the same sort that
30
may be realized in the future."
Following this report and after extensive hearings in Congress, the
Transportation Act of 194031 was enacted. Under the Act, the Commission was relieved of the obligation of formulating a national plan
of consolidation. The Act stated that the initiative for mergers rests
with the railroad§, and that the Commission's function is to pass
upon the merits of applications under the standards provided in
Section 5(2).
Ill. Statutory Provisions and Recent Mergers
Section 5(2) of the Interstate Commerce Act, as amended by the
Transportation Act of 1940, provides for the initiation of applications for consolidations by railroads and for the approval by the Commission of those mergers -that are found to be in the public interest.
In determining whether a proposed consolidation is in the public interest, four factors should be taken into consideration. These factors
are: "(i) the effect of the proposed transaction upon adequate transportation service to the public; (2) the effect upon the public interest
of the inclusion, or failure ,to include, other railroads in the territory
involved in the proposed transaction; (3)the total fixed charges resulting from the proposed transactions; and (4) the interest of the
32
carrier employees affected."
In addition of these general considerations, the Commission is
given power to impose, as a condition to approval, the inclusion of
another railroad which has requested such inclusion and which is sit1I.R. Doc. No. 583. 7 5 th Cong., 3 d Sess. 36-39 (1938).
-'Consolidations and Mergers in the Transportation Industry," op. cit. supra
note 24 at ii.
"54 Stat. 898 (1940).
2r. Stat. 9o6 (194o).
1o
VASHINGTON AND LEE LA TV REVIEITr
[Vol. XIX
uated in the territory involved. No consolidation may be approved
if the total fixed charges are increased, unless a finding is made that
such an increase is not contrary to the public interest. The Commission ig also given authority to attach conditions to an order of approval in order to protect the job rights of railroad employees affected
by a consolidation. However, in attaching terms and conditions, the
Commission must make sure:
"[T]hat during the period of four years from the effective
date of such order such transaction will not result in employees
of the carrier or carriers by railroad affected by such order being
in a worse position with respect to their employment, except
that the protection afforded to any employee pursuant to this
sentence shall not be required to continue for a longer period,
following the effective date of such order...."'.3
In the post-World War II period the Commission has been called
upon to interpret the merger provisions of sections 5(2) in over ninety
cases. 34 The majority of these cases involved absorptions of subsidiaries. The principal consolidations are listed and briefly summari7ed
below:
(i) The acquisition of the Nashville, Chattanooga 8c St. Louis Railroad by the Louisville Se Nashville Railroad in August 1957.33 The
merger involved two railroads that had a very close and cooperative
relationship for many years, including a broad program of interchange
and routing agreements, and the avoidance of competition in the
soliciting of traffic. The carriers estimated that savings of $31/ million
a year would be realized by 1962. Although opposed by railroad labor
and the City of Nashville, the latter claiming that the merger would
reduce Nashville "to a one-railroad community,"3 6 the Commission
based its favorable decision on the operating advantages that would
follow. Among these were the development of a more balancea traffic pattern, increased diversification which would provide increased
competition to water and motor carriers, savings in solicitation, a
more efficient and economical one line service, a more adequate car
supply, and better promotion of industrial development. In addi"'54 Stat. 906, 907 (1940).
S'The Commission's annual reports summarize its disposition of applications
tinder this section.
-295 I.C.C. 457 (1957). See also Stot v. United States, 154 r. Supp. 389 (S.D.N.Y.
1957), aff'd per curiam sub nom. City of Nashville v. United States, 355 U.S. 6.3
(1957).
4The City of Nashville's opposition was carried as far as the U.S. Supreme
Court, but it was unsuccessful. City of Nashville v. United States, 355 U.S. 63 (1957).
1962]
RAILROAD MERGERS
11
tion, the Commission took note of the development of a better competitive position in relation to other major trunk lines in the area.
(2) The acquisition of the Virginian Railroad by the Norfolk &
Western Railway in October 1959.3T The lines are two of the most
profitable in the country. Nevertheless, in approving the merger, the
Commission was impressed by the operating advantages which it offered. Both were heavily dependent on coal for revenue-over 85 per
cent for the Virginian and 66 2/3 per cent for the N & W-but the
coal fields served by the two roads were different and, therefore, complementary in operation. The former generally tapped mines producing steam coal for utilities, and its business was mostly eastbound
to Hampton Roads for coastal shipping and export. The road had
been unable to develop westbound merchandise traffic while its westbound coal traffic was essentially a short-haul operation. The latter's
major traffic is bituminous coal shipped to Middle Western steel
mills. In their application to the Commission, the roads said that savings of $12 million a year would result in five years from coordinated
operation of yards, shops, and terminals; from the integration of administrative accounting, soliciting and other activities; from better
use of facilities; and from a better movement of east-bound coal. The
Commission said, "Merger of the Norfolk & Western and Virginian
will plainly result in a larger, stronger company, better able to meet
the challenges faced by the railroad industry and better able to attract and hold competent management personnel."
(3) The acquisition of the Delaware, Lackawanna & Western Railroad by the Erie Railroad in September ig6o. 38 This merger was between .two lines in financial trouble: the D L Se W lost $3-9 million in
1958, $4.3 million in 1959, and $4 million in 195o, while the Erie lost
.3-7 million, S5.7 million, and $8 million in 'the same years. The
D L &-W depends heavily upon bridge and local traffic (bridge traffic
is that which both originates and terminates on other railroads); the
Erie on service to the Cleveland, Pittsburgh, and Youngstown steel
areas. Again in this case, the Commission was convinced that the merger would result in greatly improved operating conditions. 39 Several
railroads intervened, stressing the importance of preserving joint
routes, interchange arrangements, and switching practices. The Commission, in response, placed several restrictions on the lines in approving the merger. In addition, very strong opposition came from
r3o7 I.C.C. 401 (1959).
'Erie R.R.-Merger-Delaware, Lackawanna & Western R.R. (i96o).
"'Will Merger Cure Their Troubles?," Business Week 62-64, October 8, 196o.
WASHINGTON AND LEE LAW REVIEV
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[Vol. XIX
the Railway Labor Executives' Association, which will be discussed
below. The two roads estimated that savings will reach $13 million annually after five years.
(4)The acquisition of the Minneapolis & St. Louis Railway by the
Chicago &cNorth Western Railway in October 1960.40 The two lines
connect at several points, such as Minneapolis, Des Moines and Peoria.
The Commission said that the acquisition would permit direct single
line service and routes between such points at Duluth-Superior, Minneapolis-St. Paul and Chicago, St. Louis and Peoria, thereby reducing time-consuming and costly interchanges, providing greater
flexibility in rate-making "all to the benefit of the public generally."
While both roads have taken steps in recent years to modernize their
properties, the Commission pointed out that the M & S T L "lacks
the size and volume sufficient to realize the maximum advantages from
the efforts." The M & S T L is handicapped by light traffic, poor
diversity and a lack of sufficient specialized equipment. The property
rights acquired include the motor carrier operations of the M & S T L,
which will permit the merged system to develop a piggyback service.
Savings of $3million a year are expected. There was no opposition
to the merger.
(5)The merger of the Minneapolis, St. Paul and Sault Ste. Marie
Railroad, the Wisconsin Central Railroad, and the Duluth, South
Shore &cAtlantic Railroad to form a new rail system called the Soo
Line Railroad Co. in December 1960.41 All three of the railroads are
controlled by the Canadian Pacific Railway. The merger is expected
to result in savings of 51.2 million a year. As the three lines do not
serve exactly ,the same areas, little will be saved by combining duplicate tracks. However, the Commission said that the railroads will be
able to reduce expenses by consolidating executive and supervisory
offices, maintenance facilities and purchasing offices. The merger also
will "permit more efficient use of motive power, result in improvement of car supply through the unified system and increase the efficiency and economy of the system's overall operations."
The only significant unification the Commission has turned down
in recent years was the St. Louis-San Francisco Railway's proposal to
control the Central of Georgia Railway. 42 Although the proposed
merger seemed to offer important advantages of an end-to-end type of
merger, the Commission rejected the plan on the grounds that stock
4
OChicago & N.W. Ry.-Merger-Minneapolis & St. Louis Ry. (1960).
WaIl Street Journal, Dec. 5, 1960, P. 8, cl. 3.
12Central of Ga. Ry. Control, 295 I.C.C. 563 (957).
41
1962]
RAILROAD MERGERS
control of Central of Georgia had been acquired by the Frisco through
a voting trust without prior Commission approval, thereby violating
section 5(4) of the Interstate Commerce Act. The decision allowed
the Frisco to retain beneficial interest in the stock, but transferred it
to a corporate trustee.
As of March 15, 1962, there were eight merger applications pending
before the Commission:
(i) Pennsylvania Railroad to acquire the Lehigh Valley Railroad;
(2) merger of the Atlantic Coast Line Railroad into the Seaboard Air Line Railroad and the establishment of a new
company called the Seaboard Coast Line Railroad;
(3) bid by both the New York Central Railroad and the Chesapeake & Ohio Railway to acquire control of the Baltimore
& Ohio Railroad;
(4) Southern Railway to acquire the Central of Georgia Railway;
(5) bid by both the Southern Pacific Company and the Atchison, Topeka & Santa Fe Railway for control of the Western
Pacific Railroad;
(6) Norfolk & Western Railway's merger with the New York,
Chicago & St. Louis Railroad (Nickel Plate), acquisition of
of the Sandusky Line, and lease of the Wabash Railroad;
(7) consolidation of the Great Northern Railway, the Northern
Pacific Railway, and the Chicago, Burlington & Quincy
Railroad, and lease of the Spokane, Portland & Seattle Railway, to form a new system called the Great Northern Pacific & Burlington Lines; and
(8) merger of the Pennsylvania Railroad and the New York
Central Railroad and the formation of a new company to
be called the Pennsylvania New York Central Transportation Company
In addition, several other lines have announced that they are
continuing to make studies concerning possible mergers, although
formal applications have not as yet been made to the Commission. 43
13There two studies underway are significant. (1) Norfolk & Western Railway and
Erie-Lackawanna Railroad. Later in October of 1!61, The Erie-Lackawanna agreed
to change its stand and support N & W's merger plans. At the same time, it was announced that the N & W had agreed to consider the Erie for inclusion in the
proposed system if the Commission approves N & W's current plans. See Wall Street
Journal, October 25 , 1961, p. 2, col. 2. (2) Norfolk & Western Railway and Akron,
Canton & Youngstown Railroad. Early in December of x96s the directors of A C & Y
agreed to sell its outstanding stock to the N & W. The A C & Y also agreed to
withdraw its position for inclusion in the proposed unification of the N & W, the
Wabash and the Nickel Plate. The proposal is contingent upon acceptance by the
holders of 8o% of A C & Y's common stock, and on the pending N & W merger plans
now before the Commission. See Wall Street Journal, Dec. 8, 1961, p. 8, col. 2.
14
WAISHINGTON AND LEE LAW REVIEW
[Vol. XIX
IV. The Economics of Mergers
The advantages of railroad mergers can be grouped into three
major catgories: (i) reduction of costs, (2) improvement in service, and
(3) efficiency of regulation.
Reduction of Costs. As discussed above, the reduction of costs has
been the advantage that has received the most attention and largely
explains the recent trend toward more railroad mergers. One observer
estimates that if the railroads were unified into four noncompetitive
regional systems the potential savings would reach $1 billion annually.44 According to the estimates made in the five mergers recently approved, savings of approximately $32.5 million are expected within
five years.
These cost reductions are expected from savings in administrative expenses, operating expenses, and financial costs. The savings in
administrative expenses, while not the major area of savings, are substantial: reduction and consolidation of hundreds of general offices,
elimination of top level management personnel, and simplified car
accounting. In addition, savings in purchasing (due to advantages
of volume purchases), traffic solicitation, advertising, public relations,
and accounting would be large because one-fifth of the present personnel of the railroads is engaged in ,these activities.
The savings in operating expenses are potentially the most important to be achieved from mergers. These include the elimination
of duplicate facilities and services, reduction in switching and interchange at major terminal areas of origin and destination, better utilization of power and crews, concentration of long-haul traffic on the
more direct and efficient routes, and a more intensive use of the most
favorably located lines. All of these advantages may accrue in either
an end-to-end merger or a parallel line merger, but not to the same
degree.
Mergers may result in several financial advantages to the roads
concerned. As investment in real estate, especially in urban areas,
runs into 'the millions, savings would result from the consolidation of
terminal properties. "In Chicago terminal areas alone this could
amount to many millions of dollars." 45 The elimination of trackage
"Gilbert Burck, "A plan to Save the Railroads," Fortune, August, 1958. The
author estimates $4oo million would be saved in terminal operations, $ioo million in
reduced maintenance and operation of abandoned trackage, $3oo million from inproved routing and utilization of equipment, and at least $2oo million from savings
in purchasing, centralization in repair shops, and reorganization in less than carload traffic operations.
"National Transportation Policy, Preliminary Draft of a Report prepared for
1962]
RAILROAD
MERGERS
15
and terminal facilities, in addition to the connected real estate,
would also bring about a reduction in the tax burden which bears so
heavily upon the entire railroad industry. 46 Greater flexibility in the
use of existing physical facilities might well reduce the capital required by the roads to provide for regained traffic.
Improvement in Service. While mergers offer substantial savings
in costs to the railroad industry, equally important are their effects
upon service to the economy. As stated by a recent congressional report:
"The time has passed when railroads can expect shippers
to give them their freight without assurance of dependable delivery time. The amount of interchange required in major
terminal areas is such that for most shipments this is impossible. The time required after arrival in the inbound yard of
the trunkline carrier to the actual spotting of the car may exceed ,the total elapsed time of moving the car half way across
the country. Furthermore, there is substantial evidence that
the quality of service for general freight (exclusive of the expedited freight 'train service for perishables, etc.) has deteriorated rather than improved in recent years, not only in terms of
the frequency of freight train service, but also in terms of delivery time. This development arises from the effort to maximize
the economy of individual train movements through larger and
larger trains to handle a given quantity of freight over a
route. This has meant fewer 'trains with more cars to be handled
at intermediate yards and terminal47areas which have not been
revamped to accommodate them."
Mergers, especially end-to-end mergers, tend to reduce costly delays
incident to interchange of both route and terminal operations by
facilitating single line freight. A more dependable scheduled service
should be the result. Moreover, unification of less-than-carload shipments, as well as pickup and delivery service, would greatly benefit
this merchandise traffic. In short, mergers offer several advantages to
railroad users, and hence to the total economy.
Efficiency of Regulation. At the present time there are more than
500 operating railroads-i io Class I railroads, some 300 Class II lines,
and more than 200 switching and terminal companies. The Interstate
Commerce Commission faces a gigantic task in carrying out its regulatory duties. Mergers, which would reduce the number of operating
the Senate Committee on Interstate and Foreign Commerce, 87 th Cong., ist Sess. 246
(196).
16See Phillips, "The Railroads' 'Four Freedoms' and Regulations," 6 8Public
Utilities Fortnightly 73 -88 (g6i).
'-National Transportation Policy, op. cit. supra note 42, at 246.
WASHINGTON AND LEE LAW REVIEW
16
[Vol. XIX
companies, would simplify the task of regulation. The many cases involving the division of rates would be reduced, thereby eliminating
much litigation. "Other advantages in regulation include: simplification of providing access to -terminal areas; admiristration of routing regulation; ... the establishment of service standards; the reduction of tariffs to be approved; and reduction of suspension cases." 48
Mergers, however, are not the most important method of facilitating
regulation. This problem will be discussed in section VI.
V. The Public Interest
In acting upon a railroad merger proposal, the Commission must
decide whether the consolidation will be "consistent with the public
interest." What standards should the Commission use in making such
a determination? What, in other words, is the public interest? To answer the latter question, four factors stand out: the role of competition; the weak-strong railroad problem; the effect upon railroad
employment; and the benefits which will accrue to the public. Each
will be examined in turn.
i. The Role of Competition. Much confusion and uncertainty still
exist concerning the desirability of preserving competition in the railroad industry or of abandoning it in favor of monopoly. Historically,
as earlier outlined, mergers were halted by government intervention
through the antitrust laws and then were actively encouraged between
192o and 1940. Today's mergers, however, are taking place in a dif-
ferent business and political atmosphere and under new conditions
and pressures than have prevailed in previous large-scale merger attempts. These conditions were stated by the Commission in the Louisville & Nashville case as follows:
"With the construction of new highways, referred to by some
as 'expressways' and others as 'freightways,' the competition of
the railroads from motor carriers will be enhanced. Without
doubt, the possibility of faster trunkline schedules will disadvantageously affect the ability of the railroads to compete
with them, particularly with respect to the more lucrative traffic. It is common knowledge that established airlines are taking
a large share of the passenger traffic formerly handled by the
railroads.... The foregoing reflects how imperative it is for the
railroads to do everything in their power to enhance their competitive situation through all possible economies and efficient
proposed merger is designed to accomplish
operations. The
9
that result." 4
48(d. at 243.
I.C.C. 457, 468 (1957).
"295
RAILROAD MERGERS
And, in the recent Norfolk & Western merger decision, the Commission stated:
"The monopoly status enjoyed by the railroads in the nineteenth and early twentieth centuries has now disappeared com)letely with the emergence of strong and growing competitors.... While there may be some slight lessening of competition as a result of the proposed merger, we do not regard that
fact as of controlling importance. The evidence establishes that,
after the merger, strong competition will still be afforded by
other forms of transportation. We conclude that the public interest would not be adversely affected by any lessening of competition which may result from the proposed merger." 0
The Commission seems to feel that it may authorize consolidations which would run counter to the antitrust laws if the advantages of a proposed consolidation outweigh the disadvantages of possible elimination or lessening of competition. Decisions of the Supreme
Court in 1944 and 1959 make it clear that the Commission will be
supported.5' Moreover, the Commission seems to be going one step
further by pointing out that so long as the public has a choice of
transportation, the elimination of inter-railroad rivalry cannot be
equated with the elimination of competition. In the majority of cases
railroads do not compete with each other. Rates, for example, are
set in rate bureaus. As a result, competition tends to be inter-modal
rather than intra-modal and this type of competition is steadily increasing. Given these factors, antitrust policy and the maintenance of
competition among railroads should not dominate Commission policy
towards mergers. Intra-modal competition should only be preserved
where traffic justifies two or more efficient railroad systems.
2. The Weak-Strong Problem. The primary purpose in the provisions for consolidation in the Transportation Act of 1920 was that
of solving the weak-strong railroad problem. It was felt that this was
the best way to establish a rate level for a given region of the country
which would permit the weak roads to earn a fair rate of return
without permitting the strong roads to earn an excessive return. The
problem, of course, is still present. There are nearly 225,000 miles of
railroad in -the country. Ten per cent of that mileage or 23,000 miles,
carries 50 per cent of the intercity rail freight traffic. At the other
end, 30 per cent of the total mileage, or about 67,000 miles, carries
less than 2 per cent of all intercity rail freight traffic. Excess capacity
',F.D. 20599, Sheets 2o and 21 (95g).
'McLean Trucking Co. v. United States, 321 U.S. 67 (1944); Minneapolis & St.
Louis Ry. v. United States, 361 U.S. 173 (959).
18
WIASHINGTON
AND LEE LAV REVIEW
[Vol. XIX
is especially serious in the eastern part of the country, where there
are 43 Class I railroads.
Many of these lines are no longer needed and cannot be economically justified. They should be discontinued. As for the others-those
that are necessary ,to the industry-the Commission has the authority to
make sure that reasonable safeguards are given to protect them when
mergers of parallel or competing lines are approved. The Commission also has the atuthority to include other lines in the territory involved in any merger proposal. To date, however, the Commission has
shown no willingness to use this power, -2 although it has been reported
that the Commission is currently undertaking a comprehensive study of
the nation's railroad needs which will include "regional studies of
which railroads should merge with which.... The new policy reflects
recognition of Congressional, public and union opposition to any
hasty, indiscriminate approval of railroad-proposed mergers that
might cut jobs and hurt service-along with a continuing insistence
that savings possible through marriage still represent the best long3
range hope of railroad salvation."
The voluntary mergers already pending or under study indicate
a pattern for the future. Eventually the nation may have 8 or 9 major
systems: a single system for New England, two linking the East and the
Midwest, one or two Southern routes, one between the Midwest anti
the Southwest, and three connecting -the Midwest and the West Coast.
Experience shows, however, that voluntary mergers are the best means
of achieving economies in the industry. As one railroad executive
recently answered when asked how many systems we need: "I don't
think anybody can answer that question at this time.... It's obvious
that we've got too many-way too many. Now, whether we ought to
have two or three systems in the East, or possibly four, I don't think
can be decided definitely or accurately at this time. We can talk in
process, as I see it, rather
those terms, but it's going to be a gradual
4
overnight."
develop
will
that
one
than
-2In June, i96o, the Commission refused the New York Central's request that the
Commission consolidate into a single hearing the merger application of the C & 0B & 0 and the merger application of the N & W-Nickel Plate. The Commission
also refused the request of the Erie-Lackawanna to consolidate the Pennsylvania's
application to control the Lehigh Valley with the N & W-Nickel Plate proposal.
Both the New York Central and the Erie had hoped to convince the Commission
that it should order the other railroads to include them in their merger plans.
Wall Street Journal, June 8, 1961, p. 1, col. s.
-Wall Street Journal, June 8, 1961, p. 1, Col. i.
• lnterview with Stuart Saunders, President of the Norfolk & Western, U.S.
News & World Report, May 15, 1961, p. 78. Some indication that the voluntary
approach is the correct one can be seen in recent developments. In the eastern
1962]
RAILROAD MERGERS
19
At the same time, voluntary mergers present several perplexing
questions. Unless the Commission has a plan outlining the future
structure of the industry in mind, can it logically continue to approve
railroad mergers on a case-by-case basis? If voluntary mergers are largely among the stronger carriers, might not the Commission be faced
with a future structure of strong roads on the one hand and numerous
weak roads on the other? From an economic point of view, it would
be better to deal with the weaker roads now rather than to wait and
let them go bankrupt. Apparently this was the fear of the Department
of Justice and its reason for reportedly favoring a merger of the New
York Central, Chesapeake & Ohio, and Baltimore & Ohio to balance
the alleged future plans of the Norfolk 9- Western to merge with the
Pennsylvania system. , ' But without mandatory authority to compel
mergers, any proposed Commission plan might well bring the current
voluntary merger movement to a sudden halt. It would seem, however,
that the Commission must have such a plan in order to deal adequately with the voluntary mergers under consideration. The plan should
be tentative, flexible, and perhaps unannounced, but only in this way
can the weaker roads have some assurance that their problems are
being considered. And when a road, considered necessary to the industry and the economy, is being excluded from a proposed merger,
the Commission will have to exercise its power and order its inclusion
in the merger.
3. Railroad Employment. Under the Transportation Act of 1940,
the Commission must provide that during a period of four years from
the date of an order allowing a merger no employee of any involved
railroad shall be placed "in a worse position with respect ,to... employment," subject, however, to any agreement the carriers and the
employees reach as to other provisions for employee protection. For
part of the country, where excess capacity is the greatest, three large systems seem
to be developing. The first is a combined Pennsylvania-New York Central system.
The second is a Chesapeake & Ohio-Baltimore & Ohio system. The third is a Norfolk & Western-Nickel Plate-Wabash system, which may possibly include the ErieLackawanna. Should this pattern materialize, the smaller lines, many already
allied with one of these major lines, would be included in the combines. For example, the B & 0 owns 42.85% of the Western Maryland and 42.22% of the Reading
Co. In turn, the latter owns 56.6% of the Central R.R. Co. of New Jersey. The
C & 0 also owns 7.31% of Western Maryland.
-Wall Street Journal, June 22, 1961, p. 13, cols. I & 2. The Pennsylvania owns
approximately 35% of the Norfolk & Western's stock. The Department of Justice's
concern, however, was premature. In their formal application filed with the Interstate Commerce Commission, the Pennsylvania stated its willingness to transfer its
N & W stock to an independent voting trustee "pending ultimate disposition" of
the stock "within a reasonable time in an orderly manner." Wall Street Journal,
March 12, 1962, p. 7, cols. 2 & 3.
20
WASHINGTON AND LEE LA IV REVIEIIW
[Vol. XIX
years the Commission has interpreted this provision as meaning that
economy dismissals could be made as long as compensation is provided for displaced workers. Two railroad unions recently challenged
the Commission's approval of the Erie-Lackawanna merger, which
called for abolishing nearly 2,ooo jobs and transferring more than 2,000
others over five years. Severance pay for those laid off and compensatory pay for those switched to jobs with lower salaries were included
in the merger plan. The unions argued that the law forbids firings
for four years, and that provisions for compensating displaced workers did not meet ,the requirements of the Act.
But the Supreme Court upheld the Commission's interpretation.
Writing for the majority, Chief Justice Warren said: "We are unwilling to overturn a long-standing administrative interpretation of
a statute, acquiesced in by -all interested parties for 2o years, when
all the signposts of Congressional intent ... indicate that the administrative interpretation is correct."5G Justice Douglas, the lone dissenter, declared: "The toll which economic and technological changes
will make on employees is so great that they, rather than the capital
which they have created, should be the beneficiaries of any doubts
that overhang these legislative controversies when they are shifted
'7
to the courts."
The reduction of jobs is not, of course, the direct objective of
mergers. The railroads had 78o,ooo employees in 196o, down 43 per
cent from 1946. Mergers accounted for an insignificant percentage of
this decline. It is well known that the industry continues to suffer from
various featherbedding practices, estimated to be costing the carriers
nearly $5oo million annually. Approximately one-half of this amount
is currently being paid to firemen and helpers on diesel locomotives.
With employment dropping, as well as freight traffic, the long-run interests of labor would seem to be served by a strengthening of the
nation's railroads through mergers. The Commission's interpretation
of section 5(2) seems to provide ample protection to labor displaced
by progress.
4. Public Benefits. Enough has already been said to indicate that
the public will benefit from fewer, but stronger railroad systems. Increased efficiency will result in lower rates and greater capital expenditures for better service. Moreover, a strong and efficient railroad system
is vital to the national defense.
5Brotherhood of Maintenance of Way Employees v. United States, 366 U.S.
j69 (i96).
5-Id. at 921.
1962]
RAILROAD MERGERS
21
VI. Concluding Considerations
Public policy toward railroad mergers has passed through three
distinct periods. From 189o to 1920, public policy sought to maintain
competition among the nation's railroads. In the period 1920 to 1940,
consolidation was encouraged, with the plan of ending up with several
well-balanced railroad systems. The third period began with the Transportation Act of 1940, which permits voluntary mergers if they are
consistent with the public interest.
Within the past five years, a significant merger trend has started,
encouraged by the permissive attitude of the Interstate Commerce
Commission. Nor is it mere speculation to suggest that the trend will
continue in the future. It has been argued above: (i) that mergers
offer substantial benefits to both the railroads involved and to the
public; (2) that antitrust policy should have an insignificant role in
the present merger movement; (3)that while voluntary mergers offer
the best solution toward achieving a more balanced railroad system
in the United States, the Interstate Commerce Commission should
have a tentative and flexible plan outlining the future structure of
the industry in mind against which it can approve merger plans as
they are submitted; (4)that competition in the transportation industry
is largely inter-modal, with the result that public policy toward railroad mergers should recognize 'that effective intra-modal competition
should be preserved only where traffic justifies two or more efficient
systems; and (5)that present law provides ample protection for employees displaced by consolidations. And yet, an essential question
remains: can mergers save the American railroad industry?
That the United States needs a modern, up-to-date system of transportation, and one that is efficient and economical, is quite obvious.
While more controversial, today's system is handicapped by a tremendous amount of surplus capacity, particularly in the railroad industry. Mergers offer perhaps the best means, short of nationalization, of achieving a more balanced and efficient railroad system. Under the conditions earlier examined, mergers among the nation's railroads will neither lead to monopoly nor result in the exploitation of
the public. On the contrary, as competition within the transportation
industry is largly inter-modal, mergers will lead to greater competition if a more efficient railroad industry is built. The present merger
movement clearly has this as its primary aim.
At the same time, mergers are not a panacea for the nation's railroad problems. The potential public benefits of a stronger, more efficient railroad industry will be lost unless aided by several basic changes
22
WASHINGTON AND LEE LAW REVIEW
[Vol. XIX
in public policy toward the industry. In addition to excess capacity, the
industry is subject to antiquated regulatory concepts and procedures;
it is the victim of discriminatory local and state taxation; it operates
under wasteful, and expensive, labor practices; and it faces increasing
competition from other modes of transportation, which are heavily
subsidized by the public.-s All of these problems must be dealt with if
the railroad industry is to survive under private ownership. And in
making the necessary changes, it must be remembered that the railroad problem is but one aspect of the broader problem of how transportation as a whole can be improved, so as to give better service,
more efficiently, at the lowest possible rates.
"'These problems are discussed at length in "The Railroads' 'Four Freedoms'
and Regulations," op. cit. supra note 43.